Japan's yen slid to a 40-year low this week, pushing up the cost of imports and fueling broader inflation that directly impacts the working class. Finance Minister Satsuki Katayama declared on Wednesday that Japan would take "decisive action" in the currency market if needed, signaling the state's readiness to intervene. This comes as the dollar topped 163 yen overnight, reaching a four-decade high.
Chief Cabinet Secretary Minoru Kihara echoed this sentiment, stating the government was prepared to "respond as appropriate at any time." Tokyo's alarm over the sagging currency is clear. Markets are now watching for signs of intervention, following similar actions in April and May when the yen weakened past the 160-dollar mark.
Top currency diplomat Atsushi Mimura, often seen as central to intervention timing, offered no official comment when questioned by reporters on Wednesday. Despite official "jawboning," the yen's downtrend has continued. Analysts point to broad-based dollar strengthening and the Bank of Japan's (BOJ) still-low interest rates as primary drivers.
Who Bears the Cost
The yen hit 163.24 per dollar in New York trade two days ago, Tuesday, July 21, 2026, marking its weakest point since late 1986. This decline occurred amid a broad dollar rise. The latest round of attacks in the Middle East pushed oil prices higher, stoking concerns about U.S. inflation and strengthening the dollar.
A resumption of U.S. rate hikes could further widen the interest rate divergence with Japan. While the BOJ has stated its readiness to continue raising rates, Premier Sanae Takaichi's first economic blueprint suggested her administration's aversion to higher borrowing costs. This stance prioritizes corporate debt holders and government spending over the immediate financial relief for workers facing rising prices.
The BOJ did raise interest rates to a 31-year high of 1% in June this year. This move was a response to soaring energy costs, directly linked to the Middle East war, which compounded inflationary pressures from a weak yen and a tight job market. Such conditions often lead to real wage suppression, as prices outpace any nominal wage gains.
The State's Role in Crisis Management
Takahide Kiuchi, executive economist at Nomura Research Institute, noted that while Middle East developments triggered the yen's break below 163, a significant factor was Takaichi's blueprint. He argued it failed to dispel concerns over Japan's fiscal policy and the potential for government meddling in monetary policy. This highlights the inherent tension between state fiscal policy and independent monetary policy, often resolved in favor of capital's interests.
Kiuchi warned that if the government were to exert significant influence over monetary policy, the BOJ could fall behind in addressing inflation. Such views, he explained, are weakening the yen and could perpetuate the trend. A Reuters poll, conducted before the June rate hike, indicated many analysts expect the BOJ to raise rates to 1.25% by year-end, a measure that still fails to address the systemic causes of currency instability and wealth concentration.